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Kevin O'Leary

Q2 Earnings Updates: Centene, Humana, & Teladoc

July 31, 2022
Company Research


Link (Transcript) / Link (Announcement)

Humana had a good quarter with above expected performance in the Medicare Advantage book of business, while sharing that it is the latest insurer to go down the Optum route of splitting its business. 

Humana is realigning into two business units - CenterWell and Insurance Services

Humana is lumping its insurance products, which today are in the Retail Segment and Group and Specialty Services Segment, into one operating unit called Insurance Services. It’s also elevating the Healthcare Services segment, which will be called CenterWell moving forward. It’s a move that mimics what UHG has paved the trail in doing by setting up both an insurance division and services division. Obviously it indicates the strategic weight Humana is placing on CenterWell building out care delivery assets, both via home health (Kindred at Home) and primary care clinics (the Welsh Carson JV).

It’s a logical move for Humana to make in order to share the growth story of CenterWell’s assets with investors, although certainly Humana seems a little late to the game in making this move. Humana could use this to its advantage, though, as Optum has yet to share many details about how successfully it is moving its care delivery business to value. If Humana starts consistently sharing metrics about the progression of its primary care clinics to value, in a similar manner to what Oak Street and agilon have done, it would certainly put more pressure on Optum to do so as well. Yet during this earnings call, Humana also provided very little detail in response to an analysis question about how it is moving members to VBC, which felt very similar to the UHG earnings discussion. It will be interesting to see what metrics Humana chooses to share at the upcoming investor day in September.  

Humana Continues to Focus on Primary Care Center Growth

Humana continues to grow its primary care center footprint, both via de novo growth and acquisitions of clinics. Humana noted during the earnings call that it acquired 10 clinics during the quarter in addition to 4 de novo clinic openings. At the end of Q2, Humana had 40 de novo clinics, up from 32 at the end of 2021, and 182 wholly owned (acquired) clinics, up from 174 at the end of 2021. The differences in providers per clinic type (de novo clinics have 1.9 providers per clinic, while wholly-owned have 3.0 providers per clinic) and associated differences in patients served hint at some of the pros and cons of each strategy – with the wholly owned clinics you acquire existing providers and their patient populations, while with de novo you have to hire the providers and build out the population. It’ll be interesting to see moving forward if Humana starts reporting more details on MLRs across these different approaches. Humana anticipates being at 250 clinics by the end of the year, meaning they’ll have opened / acquired ~44 clinics over the course of the year.

Humana often seems to come up in conversation as one of the more logical buyers for MA primary care startups, but given this strategy, I’m not so sure that’s the case. Why pay a premium for an asset like Oak Street when you can successfully demonstrate that you can grow this business both organically and via acquisition already? If Oak Street, or any other primary care startup for that matter, were being valued like any other primary care clinic that Humana could roll up into this play, then an acquisition seems like it would make sense. But I just don’t see how they’d come together on valuation terms at the moment. 

It’s interesting to compare the two charts below included in Humana’s earnings related to the primary care clinic growth and how many providers are under VBC contracts:

The chart below depicting providers that are in VBC relationships with Humana is a bit challenging to square with the chart above. An analyst asked about the decline in 200 Proprietary Shared Risk providers that Humana has reported this year, which Humana said had to do with moving some PCPs in IPAs in order to align these metrics to the disclosure above. Which is all well and good, but it still doesn’t really seem to match the disclosure above. Either way, it’ll be interesting to watch how Humana’s pipeline of VBC providers continues to evolve over time.

The Core MA Business is Performing Well

Life is good for the big insurers at the moment, and it is no different for Humana which raised guidance after solid medical cost performance, driven by lower inpatient utilization in the MA product and lack of a COVID-19 headwind. That lower utilization was slightly offset by higher inpatient unit costs, which Humana attributed both to the fact that lower cost inpatient stays are shifting to outpatient (primarily orthopedic volume), but also that unit costs were increasing in general.


Link (Transcript) / Link (Earnings)

Teladoc shares tumbled after reporting earnings, despite reporting solid membership growth during Q2. Teladoc reported another massive loss, due primarily to a $3 billion goodwill impairment charge – this follows a previous impairment charge of $6.6 billion on the Livongo acquisition in Q1’22. In hindsight, the decision to acquire Livongo seems like a massive strategic blunder for Teladoc, given the deal took place at the peak of the market, Livongo’s key leadership  team departed to start a competitive company, and Teladoc is seemingly struggling to reap the cross selling synergies of the deal. Of course, nobody could have foreseen the market turning as quickly as it has. Teladoc shared it is guiding to the low end of its range for the second half of the year due to broader macroeconomic questions, which seems concerning. 

Macroeconomic trends are creating headwinds for Teladoc’s business, both with consumers and employers.

On the employer side, Teladoc noted in response to an analyst question that HR teams are in a tough spot:

The challenge that we're seeing is in these times of economic uncertainty, all purchases are just getting a significantly higher level of scrutiny. I think we're also facing a situation where a lot of HR leaders within organizations are dealing with a very challenging time. As you've heard and read in all of the news about companies reducing workforces, having to control costs. And so I think there is a level of distraction at the same time.

This sort of news from Teladoc should be concerning for all startups that are selling to employers, as it seems like the market is growing significantly less receptive towards just trying new solutions. It’s also interesting to see Teladoc refer to this as a “distraction,” when in many ways you could argue the exact opposite. These types of situations are the core job HR teams, while all the point solutions in healthcare ultimately are a distraction.

The consumer environment is also concerning, as Teladoc also noted in its opening comments that it is seeing a decline in yield on advertising spending for BetterHelp, due to the “weakening economic environment and declining consumer sentiment.”  While Teladoc remains optimistic about its ability to push through those headwinds given its market leading position, it will be worth keeping an eye on how it navigates a landscape that is clearly changing quickly.

Primary360 continues to be a central part of the dialogue moving forward.

The call provided some good color on how Primary360 is being implemented by health plans – with some exchange plans generally using it as the default primary care provider (which makes sense as they’re looking to compete on price and I’d guess their actuaries are willing to give more of a price decrement if all primary care is funneled through virtual first), while employer plans fully-insured plans are opt-in. 

BetterHelp continues to play an outsized role in earnings calls, providing interesting insight into the consumer mental health market

It’s interesting to note that Teladoc isn’t yet seeing a decrease in the cost of advertising in the mental health market, this despite the upheaval for Cerebral and other ADHD meds players. Noting in the opening remarks to earnings that:

We still see smaller private competitors pursuing what we believe are low or no return customer acquisition strategies to establish market share. Although we do not see this as sustainable, it's difficult to predict how long this dynamic may continue.

I’d have thought Teladoc would have seen a slowing of this behavior in the D2C mental health space given all the negative publicity recently, but apparently it is not showing up yet. I will be curious to see how long that remains true for. 

What is going on with Teladoc’s members using multiple chronic conditions?

This was an interesting exchange with an analyst:

Q: [...] And maybe if you could comment a little bit just on average chronic condition PMPM, given that 30% of members are now using multiple conditions, how is pricing trending relative to the kind of $75 per member per month that we used to see with stand-alone Livongo?
A: [...] from a pricing perspective, we are really seeing no change in pricing. It still continues to be robust, healthy. So I don't see much of a change and pressure on -- from a pricing standpoint.

It seems odd that if Teladoc is increasing the penetration of multiple services sold, that PMPMs aren’t going up along with that, but are instead remaining flat. If that is indeed the case, it shines a light on how hard the upsell has been for Teladoc in expanding customers beyond a single chronic condition. Naturally, if customers were seeing value in having Teladoc manage additional chronic conditions, you’d expect those customers to be willing to pay more, which would increase PMPMs.


Link (transcript) / Link (announcement)

Centene posted a solid quarter, increasing EPS guidance for the year. It highlighted a few new plan wins in Delaware and Missouri as well as ongoing strategic repositioning, including a number of divestitures. 

Centene emphasizes its local approach

Centene starts off talking about the benefits of being local, spending time going through a number of examples of how being “local” gives them an advantage as a plan. Note - this is a long quote from their prepared remarks in earnings, which says all the more about how much they’re emphasizing a local approach… 

Local matters when it comes to growth as our unparalleled business development team improved yet again with the recent win in the state of Delaware. Years of boots on the ground, personal visits, relationship building and deep market knowledge were key to securing a contract award in Centene's 30th Medicaid State. Local makes the difference when it comes to outsized impact, as I saw on my visit to our Silver Summit Health Plan in Nevada. There, team members realized how many of our new mothers didn't have access to transportation and so they partner with an organization called Baby's Bounty to create a diaper van that could deliver baby essentials, diapers and wipes directly to Southern Nevada's tiniest and most vulnerable residents.
Local also makes a difference when it comes to innovation as I experienced firsthand on a recent trip to New Hampshire. Combating the effect of rapidly rising food prices and knowing the risk food and security presents to our Medicaid members, our team at New Hampshire Healthy Families jump started their green to go program, distributing locally sourced fruits and vegetables from food vans strategically positioned across the Granite State. So let me tell you where local really makes a difference. Local makes a difference when it comes to caring, the kind of deep personal caring that comes when your customer is also your neighbor.
On May 14, when shots rang out in the aisles of a neighborhood grocery store in Downtown Buffalo, our extraordinary colleagues at Fidelis Care in New York State sprang into action. No one from headquarters had to call them and tell them what to do. They knew what to do because they were there inside the community because they were local. Within 24 hours, Fidelis employees mobilized to distribute food and needed supplies into a community whose only grocery store was surrounded in police tape.
And with the neighborhood pharmacy inside that top grocery store suddenly closed, our locally based team identified and called every one of the 373 members who had filled their prescriptions at that pharmacy in recent months. Within 72 hours, each of those 373 members received a personal call from a Fidelis Care employee checking in on them. Assuring their supply of medication was in order and assisting them in identifying additional pharmacy resources in the area. Neighbors engaging in simple but profound acts of human caring.
That's the power of local.

It’s hard to argue with any of the above, and highlights the positive impact that a local strategy can have, most importantly for members’ health outcomes, but also how it can be good for business, both in terms of business growth and also presumably medical margins. The only challenge with local, as we’ll get into below, is that it’s hard to scale anecdotes such as these consistently.

Either way, it is notable to see Centene plant a flag as pursuing a local-oriented strategy, which is not exactly what you’re hearing from many of the other big insurers these days.

Centene continues to prep analysts that STARS scores are going to be bad

Centene followed up on its investor day sharing that upcoming STARS scores are going to “underperform” in 2023, due to issues around the WellCare and Centene merger combined with COVID. As they noted:

And so early 2020, we brought Centene and WellCare together a couple of things happen, right? We tripled the Medicare book overnight. We brought two different parts together that we're operating in fundamentally different models. One was centralized at WellCare and one was decentralized very hard to run an enterprise quality program at our level of size and scale in a decentralized model. And then we send everybody home for COVID. 

What is particularly interesting here is juxtaposing the challenge they highlight of a decentralized quality program with the points they made in the earnings call about the advantages of being local. It seems like a bit of an organizational design conundrum for Centene. Certainly there are benefits to running things in a centralized manner, particularly when you’re running a quality program and trying to consistently achieve high metrics on something like STAR ratings. However, that centralized approach seems in direct conflict with the local approach highlighted above – if you’re going to be nimble and responsive to local needs, who is calling the shots? Naturally, I’m sure Centene will break out some functional areas that need to be centralized and some that will remain local, but it’s tough to do well.

Centene feels pretty strongly Medicaid redeterminations will impact margins.

Given Centene’s heavy Medicaid presence, it’s not a surprise that analysts asked a number of questions about redeterminations and the impact it will have on the business. Clearly there is a revenue headwind when redeterminations occur, but there was an interesting analyst Q&A looking at whether it will impact margins, with the theory being that Centene will see a disproportionate amount of healthy members move off Medicaid and be left with a sicker population. The exchange seemed to get relatively testy for the earnings call, with Centene pushing back hard on that concept, saying they’re not seeing it in the data, and ultimately culminating in this response:

Well, I mean, you're talking a theory and I'm looking at data. So I mean, we're not going to declare that there won't be any difference whatsoever between the pools or stayers and levers. But when we look at the zero utilizers. We look at sort of the minimal utilizers, it's that it's not that concerning.
And the other mitigating factor is that 88% of our membership is in states that we believe not based upon some Kaiser study, but we believe based upon our boots on the ground and the local presence that Sarah talked about that those states will take 10 or more months to redetermine and therefore, that's why we've got sort of this amped-up rate process in place where we're working with the states sort of forewarning them and then are going to be prepared if there is a differential in the risk pool that we need to get compensated for that.

Again, we see Centene hitting on the value of being a local partner to states and how that can be good for business. But on the whole, it’s an interesting argument to see Centene making here: 1. The data isn’t showing any concerning trends and 2. Even if it is, we have good enough relationships with states and enough lead time that we can get paid more. Both can be true, although if you believe the first point it doesn’t feel like the second point is really worth stating.